Elections and referendums with distinctly divergent market scenarios depending on the outcome of the vote can create significant event risk. That type of event risk is characterized by a binary choice: “A” or “B”, with both outcomes have meaningful probabilities such as 50-50 or 60-40. We saw this back in June of 2016 with the Brexit referendum: “Do we stay or do we go?” We also saw event risk in the US Presidential election in November 2016.
Election event risk has the potential to move markets once the outcome becomes known because pre-event, markets typically price the probability-weighted average of the two conflicting scenarios; that is, essentially the mid-point of the post-event scenarios. This means that once the outcome is known, the market will move quickly to the winning scenario.
The charts below depict how the 2016 election impacted multiple products and asset classes, all offered for trading by CME Group.
*Please note, past performance is not indicative of future results.